Mitigating the Eurozone Crisis Aftershock in FYR Macedonia

April 8, 2014

The Policy-Based Guarantee helped FYR Macedonia access international financial markets, thus creating a fiscal buffer to enable the fast repayment of arrears to the private sector and the renewal of economic growth momentum. Between 2012-2014, the program supported measures to promote major public expenditure savings, including the prioritization of expenditures to the most vulnerable impacted by the crisis.


The 2011–12 Eurozone turmoil created strong headwinds for FYR Macedonia’s economy. Weak export demand produced negative spill-over effects into the fiscal accounts, leading to poor tax performance, increased budget pressures, and weakening financial discipline. Large public arrears to private businesses for contracted goods and services and value added tax (VAT) refunds accumulated. This started a destructive cycle of unpaid Government obligations and depressed private sector activity and growth that in turn led to lower revenues—in turn leading to continued public arrears.


The World Bank helped the Macedonian Government to obtain a large commercial loan of €250 million, leveraged by a World Bank guarantee. The guarantee covered a portion of the loan, allowing the Government access to essentially closed international financial markets and a market where funding of this volume would have been otherwise impossible. This created a fiscal buffer that enabled the fast repayment of arrears and support for reforms to prevent the reoccurrence of this economically harmful problem. The loan guarantee also improved the risk perception of FYR Macedonia and expanded its visibility in international markets. Most importantly, the extended maturity significantly reduced the cost of borrowing, saving the country over €50 million in interest costs over a seven-year period.

" The conditional cash transfer program comes at the right time and complements the activities our school already had with an aim of making it possible for the students to have brighter and more secure futures, with adequate education "

Sonja Ristovska

Principal, Boro Petrusevski Secondary Vocational School in Skopje



The guarantee operation allowed all arrears, which constituted approximately 3% of Gross Domestic Product (GDP), to be paid back to businesses by early 2013. A substantial pick-up in economic activity was later observed, resulting in one of the best 2013 growth outcomes among the Western Balkan countries. The program also helped realize major public expenditure savings by introducing the centralized public procurement of drugs and other medical devices, and better targeted public social expenditures to the most vulnerable, including an increased budget for labor market activation measures important to the unfinished jobs agenda in the region. Specific results were:

  • Decreased average unit price of most frequently used drugs by at least 10% by the end of December 2012
  • Decreased average unit price for centrally procured optical medical devices by at least a third by end-December 2012
  • Increased number of health service provider contracts in the five least well-served regions by end-December 2013
  • Increased number of Social Safety Net Beneficiaries for Active Labor Market Policies from 5,700 to 11,400 by 2014
  • About 75,000 benefits claimants benefitted by November 2012 from improved service access by reducing the number of documents from five to one needed for registration and renewal
  • Over 43,000 recipients benefitted from the 5 percent increase in the level of Social Financial Assistance and Permanent Assistance means-tested cash benefits by 2013

Bank Group Contribution

The Public Expenditure Policy-Based Guarantee (PEPBG) was a stand-alone single tranche operation in the amount of €155 million ($201.5 million equivalent). The International Bank for Reconstruction and Development (IBRD) financing was used to enhance a borrowing transaction in the amount of €250 million from international loan markets.

" These are the funds that I use for notebooks and transportation to and from my home town. It greatly relieves the strain on my family's budget and facilitates my education "

Kristina Donevska

student, Boro Petrusevski Secondary Vocational School, and CCT beneficiary


With the IBRD PEPBG, the World Bank team was able to strengthen essential partnerships with other multilaterals and commercial lenders. A key achievement was facilitating a new opportunity for the Macedonian Government to gain experience with a sovereign lender that would not have engaged without a Bank guarantee. Cooperation with partners with a stake in the country’s public financial management—the European Union (EU) and the International Monetary Fund (IMF)—was also fostered.  The commercial lenders involved in the guarantee likewise gained valuable experience through engaging in a large sovereign borrowing transaction with FYR Macedonia, becoming familiar with the country risk and the Finance Ministry’s capacity to perform this kind of transaction. 

Moving Forward

The Treasury Department is continuing to implement improvements to the Treasury Information System to incorporate the entry and monitoring of multiyear liabilities. In order to prevent the reoccurrence of arrears in 2014, multiyear government liabilities will be recorded, reported, and validated in the treasury system, and the Treasury can no longer approve payment requests if liabilities are not properly registered.

Following the PEPBG, the Government agreed to a broader Public Finance Review to identify public finance challenges and potential solutions. Further private sector development reforms are being pursued by the country’s Competitiveness Development Policy Loan (DPL).

The Conditional Cash Transfer project and the planned Social Protection project continue, with the implementation of social protections and an inclusion reform agenda.

Number of people who benefited from a 5% increase in the level of Social Financial Assistance and Permanent Assistance means-tested cash benefits by the end of 2013